Wednesday, September 9, 2009

Dow Jones: "Barrick Move Drove Gold's Rise, Rally Unsustainable"

Dehedging by the world's largest gold producer, Barrick Gold Corp. (ABX), has been the driving force behind gold's move above $1,000 a troy ounce this week, a price level analysts say is unsustainable.

Barrick said late Tuesday that it will close its gold hedges at a total cost of $1.9 billion over the next 12-months.

So far the company has converted 2.4 million ounces of fixed price contracts to floating contracts since the end of June, which required the miner to buy that amount of gold in the market.

The company still has 3 million ounces of fixed price contracts to dehedge, but that will take place over a longer period of time, a Barrick spokesman told Dow Jones Newswires.

Gold hedging among producers, or the practice of selling future gold production in advance on the belief that current prices will be better than those in the future, is declining. Dehedging involves a company buying back such gold in expectation of price rises.

"We have more buying to do," the Barrick spokesman said.

Traders and analysts said the dehedging done since the end of the second quarter, before Barrick's announcement, had been a major contributor to the nearly $100 rise in the price of gold over that period.

Barrick's announcement indicates producers are accelerating the process of buying back hedges to get full exposure to the metal, in anticipation that prices will rise further.

But while dehedging has driven gold prices higher, as the amount of gold hedged shrinks, the support to prices from dehedging will begin to flag.

Barrick had 5.4 million ounces of fixed-priced contracts at the end of June. On Tuesday the company said it now has only 3.0 million ounces remaining as of Sept. 7. Therefore, it had already dehedged 2.4 million ounces between July 1 and Sept. 7, said VM Group analyst Matthew Turner. That is equivalent to a sixth of global mine production in that period.

The news is bearish for the gold price. The price rise had seen analysts scrambling for explanations. But now there is a consensus on the cause, and also that it isn't a cause likely to be repeated with the same intensity, Turner said, alluding to the Barrick dehedging.

"We conclude that recent buying from Barrick probably contributed a lot to the move in gold over the past week and that, while there may be more buying to do, we believe their outstanding position is closer to 2 million ounces than the 3 million ounces reported," UBS analyst John Reade said....MORE